It’s not easy predicting the future, but most observers would agree that
the stock market is not the place to do it. Prices can be highly
subjective, and any short-term gains or losses are frequently undone by
longer-term movements. This certainly has the ring of truth as we’re
about to find out. Let’s take a quick look at who the contrarians are
in the stock market and how they are affecting the performance of the
retirement portfolios of ordinary people like you and me.
The Smart Money
Penny pinchers and hard-core bargain hunters are always a popular topic
among short-term stock market observers, and with good reason. It’s
difficult to establish any kind of long-term trend when your entire
investment horizon is just a few days, weeks, or months. The smart money
is always looking for places to invest their extra cash, and since
traditional investments such as stocks and bonds offer some amazing
opportunities for gains, many have set up shop in the markets
craze.
Individual investors who are seeking capital appreciation rather than
dividend payouts will find high-quality stocks and investment vehicles via
the exchange-traded funds (ETFs) available in the market. These are
designed to mimic the performance of an index or basket of stocks, and
for the most part, they tend to track their underlying counterparts
closely.
The Dud Money
It’s fair to say that past performance is no guarantee of
future results, but in the short-term stock market, it usually is. The
stock market is full of fads and trends that emerge for a few
months before panning out or being undone by more sophisticated
players. One such trend that’s been gaining popularity is the idea of
shorting stocks.
If you’re not familiar, shorting is when an investor borrows shares
of a company and then tries to sell them, taking the opposite side of
the trade from their owner. The hope is that the price of the stock will
decline enough to cover the cost of the short seller, while also giving
them a small profit. This is typically done in large quantities via
specialized firms that seek out big investors and use high-frequency
queries to uncover short-term weaknesses in the market. Shorting has been
around for a very long time, yet in the last couple of years, it has
gained a lot of popularity due to technological advancements and the
availability of high-quality platforms and tools. You can also do it
yourself via platforms like eToro, which is totally free.
The Bears
The bears were once again the big story this year, as interest rates
plummeted to record lows and fueled a stock market rally that had
investors scratching their heads and wondering if this was another
bust-like pattern. Those rates gave the bond market some serious
appeal, which in turn, lured in a whole new group of bears who were
interested in short-term gains rather than long-term investing.
The bears are often seen as the opposite of the long-term capital
appreciators, yet there is one key difference between the two groups:
The bears know when to get out, while the long-term allocators tend to
think that the low rates will stick around for an eternity. The smart
money tends to look for the biggest gains available in the shortest
possible amount of time, which is exactly what the bears are looking
for.
The Bankers
The story of the bankers is often the same as that of the bears,
with the difference being that the bankers get paid to move stock prices
up rather than down. The banks’ participation in the market depends on
the interest rate environment, with higher rates meaning less volume and
less opportunity for the banks to make money. When the market is doing
well and rates are low, bankers make money the same as speculators do,
which is why so many of them have gotten into the game in the first
place: to make a buck. One important thing to remember is that the
traders in the stock market are typically the biggest players and
theadays, they are armed with complex computer models that help them
guess what prices might do next.
The Optimists
Optimists like to think that there is always a brighter side to a
story, and while it’s true that in the long term, markets tend to
recoup any and all losses, in the short term, there is no denying that
things look pretty grim. We are currently in the midst of an unprecedented
global pandemic that has devastated the entire world of sports, as well
as the economy and the financial markets. With so much uncertainty and
danger, why would anyone want to get invested in the stock market,
especially when there are easier ways to make quick money?
Well, the optimists look at the numbers and they see a market that is
still significantly higher than it was before the pandemic, mostly
because people need easy access to money and the banks still have plenty
of it to lend. People are slowly beginning to understand the risks
associated with stocks and how easy it is to lose a lot of money
speculating in the market. The optimists are looking for intermediate to
long-term gains that they can build on.
The Apple Fanboys
Apple fans are definitely a unique group in the stock market. They see
the glass as half-full rather than half-empty, with the company
continuing its march toward world domination of the market for mobile
computing. The fans believe that Apple will continue to grow and
rebound, and in the process, make everyone else’s stocks look a little
cheap by comparison.
It’s not just about the iPhone. The fans see the entire market as a
temporary speed bump, and they are taking full advantage of the
opportunity to make lots of money. They generally avoid shorting
stocks, instead focusing on buying them when they are on the rise,
especially after a significant price decline. The Apple enthusiasts are
usually very active in the market, whether buying or selling shares
of Apple. On rare occasions, they will even bet on the direction of the
market based on subjective analysis of where they think Apple’s share
price might be heading next. If they are betting on the downside, they
will place big wagers, hoping to catch a falling knife. If they are
betting on the upside, they will refrain from wagering much, as they
want to avoid losing their money if the market ends up rising. One
thing that unites these disparate groups of contrarians and
Apple fanboys is their lack of understanding of how much volatility
and risk there is in the market. They would much rather play it safe
and earn a modest return than take the chance of losing their money
in a big way. It’s not like they have a ton of it to begin with,
what with all the taxes they have to pay every month.
The Retirement Portfolios
Now, let’s take a quick look at how these investment strategies are
performing in the real world, based on actual stock market data and
retirement portfolios that were built with traditional investments
(stocks, bonds, and cash) and then transformed into more of a
commodities focus (gold, oil, and other non-traditional investments).
The data for this analysis comes from an investor who has chosen to
keep their portfolio strategy anonymous, yet we’ll use the fictitious
pseudonym, Dave, to protect their identity.
The first thing we need to understand is that when the retirement
portfolio is done right, it needs to be somewhat of a mix of all
strategies mentioned so far. Dave’s portfolio is a combination of
80% of the long-term capital appreciation strategy, 15% of the short-
term reversal strategy, 5% of the long-term bearishness strategy, and
2% of the short-term bullishness strategy.
What we see when we look at the performance of Dave’s portfolio
during the 2008 to 2019 period is a story of a roller coaster ride,
with significant performance gains and losses during the entire
timeframe. The biggest difference in comparison to the S&P 500 is that
the portfolio tends to rise and fall within a defined range, with
generally lower peaks and valleys in correlation to the ups and downs
of the S&P 500 index, as depicted in the chart below.